The COVID-19 pandemic and ensuing economic crisis have provided harsh reminders of how precarious a nonprofit’s financial stability can be. Uncertainty about the future is prompting some organizations to consider the wisdom of making board designations of unrestricted assets. Here are a few questions your organization might want to consider.
1. Are assets unrestricted?
The term “board-designated assets” generally refers to funds that haven’t been restricted by donors but are subject to self-imposed limits on their use. They’re typically intended to ensure that funding is available when needed. Board-designated funds also can play a role in fundraising by demonstrating an organization’s commitment to a specific plan or program.
They may be designated for a special, one-off purpose or set aside on an as-needed basis for a specified period of time (for example, covering contingent liabilities that may or may not arise). Unlike restricted funds, where only the original donor may remove the restrictions, designated funds can be undesignated at the discretion of the board of directors.
In most cases, funds are designated by the board, but, in some organizations, the board assigns the responsibility to management — ideally, to specific positions (such as chief financial officer) that possess the requisite knowledge and judgment, rather than to specific individuals. In such circumstances, these delegations should be formally recorded, and the board should regularly review the actual designations made by management. And, of course, every net asset designation should be properly documented.
2. What are the financial reporting implications?
One benefit of taking the time to properly document board designations is that the practice will make it easier to comply with the financial reporting requirements in Financial Accounting Standards Board Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. ASU 2016-14 requires nonprofits that follow U.S. Generally Accepted Accounting Principles to disclose board-designated net assets on their financial statements or in the notes to those statements.
Nonprofits should bear in mind, too, that designating assets can affect the amounts in the mandatory disclosures related to liquidity and the availability of financial assets. Designating a large chunk of cash for a capital project, for example, could reduce your liquidity.
3. How should you manage board-designated assets?
Best practices for organizations with board-designated assets include the adoption of formal policies and procedures related to their management. For example, the policy should require your board to establish objectives for designated assets. That might include:
- Providing an internal line of credit to better manage cash flow and allow some financial flexibility,
- Funding future programs or projects,
- Maintaining operational or liquidity reserves, or
- Funding an endowment.
The policy also should clearly delineate authority. Who can designate and undesignate funds — your board or management? Under what circumstances would exceptions be allowed?
In addition, describe procedures for monitoring designated assets, including stating whether funds will be segregated. Procedures are needed to track expenditures and collect data to comply with reporting requirements, too.
Cover your bases
Board-designated assets can prove critical to the survival of programs, projects — or your organization itself. They do come with certain obligations and responsibilities, though. Consult with your CPA to ensure you’re going down a wise path and taking the necessary steps.